Last week, Monitor warned that anyone who expects the government to ride to Hong Kong's economic rescue when Financial Secretary John Tsang Chun-wah presents his budget next week is likely to be disappointed. Although officials have more than HK$1 trillion in accumulated surpluses at their disposal, a deeply ingrained fiscal conservatism and a lack of imaginative thinking mean that government stimulus measures intended to protect jobs and support growth are far more likely to err on the side of caution than of excessive boldness. Prudence is all very well, but data released earlier this week emphasised the magnitude of the challenge facing Hong Kong's economy. Figures published on Tuesday showed the city's unemployment rate rose to 4.6 per cent in the three months to January, up from a low of 3.2 per cent last summer (see the first chart below). That's the steepest increase since the economy was side-swiped by the Sars scare of 2003. After Hong Kong's gross domestic product shrank on a quarter-on-quarter basis in both the second and third quarters of last year (see the second chart), a further contraction in the fourth quarter is inevitable. With economists now forecasting that Hong Kong's economy will shrink as much as 4 per cent this year, the unemployment rate is sure to climb further this year, testing levels last seen during Sars. So far, the government has responded to increasing unemployment mainly by bringing forward spending on pet infrastructure projects. Last week, Secretary for Transport and Housing Eva Cheng reiterated the government's claim that these will create 250,000 new jobs. But when you consider that the number is more than five times that of construction workers employed in Hong Kong in September last year and equivalent to more than 7 per cent of the city's entire workforce, you have to wonder whether the claim is credible. Ms Cheng's assertion that the projects will add HK$100 billion - or 6 per cent of GDP - to the city's economy also looks questionable. In an economy as highly developed as Hong Kong's, it is doubtful whether building a bridge to Zhuhai or a new dock for cruise ships at Kai Tak will really yield much marginal return. The likely impact of other suggested measures is also questionable. Offering businesses a subsidy of HK$3,000 a month to employ new graduates would certainly encourage them to take on college-leavers, but strict checks would be needed to ensure the subsidised positions really are new jobs. At the same time, offering rebates or raising allowances for salary tax payers would please those in work. But such handouts will not help create jobs. Given the degree of economic uncertainty, any windfalls are likely to be saved rather than spent and so will do little to support demand. Reducing the profit tax paid by companies could help protect existing jobs, but tax specialists say such a move is unlikely. However, there are other steps the government could take to improve businesses' cash flow and access to working capital. For example, the budget could extend the existing credit guarantee scheme for small businesses. In addition, it could allow companies to carry back losses sustained last year, in order to reduce the tax paid on the preceding year's profits. Both measures are likely, along with a suite of tax deductions and fee waivers, to relieve the pressure on small businesses in targeted sectors. But the scale of the assistance is likely to be small. Unlike Singapore, where last month the government proposed a bold stimulus package worth more than HK$100 billion or 8 per cent of local GDP, Hong Kong's government is going to keep a tight grip on the public purse-strings. Any stimulative package is likely to be worth at most HK$30 billion or 2 per cent of GDP, say budget-watchers; a help certainly, but nowhere near enough to rescue Hong Kong's economy from a bitter recession. Monitor got a sum wrong last week, saying the government's combined reserves of roughly HK$1 trillion amount to 'almost five years' worth of gross domestic product'. The correct figure should have been 'more than 60 per cent of GDP'. Our apologies, and our thanks to Bill Mak for pointing out the error.